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Does Japan Vindicate Modern Monetary Theory?

It is not true that Japan's experience proves that Modern Monetary Theory works, as some have argued. But increasing deficit-financed spending, in Japan and elsewhere, may still have merit, despite inflationary risks.

TOKYO – The once-obscure school of macroeconomic thought known as Modern Monetary Theory has been attracting a lot of attention lately. Some US progressives, such as Representative Alexandria Ocasio-Cortez (AOC), and economists like James K. Galbraith, now advocate including MMT in the policy conversation, while others, including Kenneth Rogoff, dismiss it as problematic and even dangerous.

Building on Abba Lerner’s theory of functional finance, MMT essentially argues that countries that issue their own currencies can never run out of money in the way private businesses can. For US progressives like AOC and presidential candidate Bernie Sanders, this implies that the Federal Reserve could print large amounts of money to fund initiatives with major long-term benefits, such as a “job guarantee” program or public infrastructure projects. Because the United States can borrow in its own currency, the logic goes, the surge in public-sector debt would not pose any real danger to the economy.

Some MMT advocates – including Stephanie Kelton, a former economic adviser to Sanders – point to Japan as proof that the approach works. Despite high public debt, its economy is steadily recovering, and standards of living are high.

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